Friday, March 27, 2009

A Case Against the "Fair Tax" - Part 2


Part 1 is here, where I primarily describe how such a regressive and expensive tax would negatively affect me and most other people in lower income tax brackets.

This part examines the real costs of the tax, which its proponents say will be a tax rate of between 23-30% on all retail sales for personal consumption of new goods and services. I gleaned most of the information in this section from FactCheck.org, a website that is well known for its fair and unbiased analysis of facts. I encourage you to read the entire article at Fact Check, since my bias against the tax is clear.

There are various views of the actual tax rates that are discussed in the article. For example, under Bush, the President's Advisory Panel on Tax Reform in 2005 calculated that a 34% rate would be needed to make the program revenue-neutral. In other words, government tax revenue would not be lost. Furthermore, the panel asserted that "fair tax" supporters used questionable accounting methods to come up with their figures. This comes from the Presidential panel and is supported on Fact Check.

However, let us assume the lowest tax rate of 23%, which the tax proponents usually state. Let's give them the benefit of the doubt here.

Taxable goods and services, under this plan, would include:
  • New home purchases
  • New car purchases
  • Rent
  • Mortgage interest
  • Interest on credit cards and car loans
  • Medical bills and prescriptions
  • Utility bills
  • Food
  • Clothing
  • Gasoline (addition to current taxes, which would not be repealed)
  • Legal fees
  • Insurance premiums
For example, a $150,000 new home would cost $184,500, plus the 23 percent tax that the buyer would pay on the mortgage interest each month. Also since there would be no income tax, mortgage interest and property taxes would not be tax-deductible.

Gasoline, at today's rate of about $2/gallon would then cost $2.46/gallon. If we were to see $4/gallon prices again, the price would increase to almost $5/gallon. All of this using the lower estimate, which by most authorities on the subject falls well short of being revenue-neutral.

Proponents of the "fair tax" will tell you that if you are in a 25% income tax bracket, your income would actually increase by 25%, since you would not be paying income tax. This is deceptive since it does not take into account tax exemptions, deductions, credits, and the progressive design of the income tax tables, where your rate gradually increases as your income increases. As I stated in my first article, my effective income tax rate on my 2007 return was 13%, even though I fell into the 25% bracket. I would be a big tax loser with the "fair tax." So would most of you. More to come in a few months.

BTW, I also had some negative things to say about our income tax system here.
Add to Mixx!